Economic theory analyzes the effects of minimum wages within the context of labor markets (c.f. labor economics). In a labor market, workers supply their labor, which is sold for wages, and employers demand labor.

The traditional economic argument views the labor market as perfectly competitive. In perfectly competitive markets, the market price settles to the marginal value of the product. Therefore, under the perfect competition assumption, absent a minimum wage, workers are paid their marginal value. As is the case with all (binding) price floors above the equilibrium, minimum wage laws are predicted to result in more people being willing to offer their labor for hire, but fewer employers wishing to hire labor. The result is a surplus of labor, or, in this case, unemployment.